JEDDAH, 13 October 2005 — Illegal money transfers like hawala, which is used for money laundering, is likely to become a thing of the past with the Kingdom coming up with a tough legislation and, at the same time, allowing overseas banks to open their branches.
Demand drafts, relatively less expensive but considered time-consuming in this era in which every minute counts, may soon have to be done away with, as the branches of overseas banks undertake money transfers for their expat communities. “Hawala is likely to wane off automatically as the Kingdom is introducing a legislation to combat money laundering of which hawala is a part,” a banker said yesterday.
Remittances by expats are likely to mark a big change with the opening of branches of their national banks across the Kingdom. The State Bank of India (SBI), which has been allowed to start operations in the Kingdom, is the first Indian bank to get a branch license from the Saudi Arabian Monetary Agency (SAMA). “Several banks have applied for branch license in Saudi Arabia, and SBI has been given the permission last month,” SAMA Vice-Governor Muhammad Al-Jasser is quoted to have said in an Arabic daily, following his participation in a banking seminar organized by the Federation of Indian Chambers of Commerce & Industry (FICCI) held in Bombay last week. India is far ahead of other developing countries in terms of workers’ remittances from abroad, receiving $23 billion in 2004, up from $17.4 billion in 2003. The figure is expected to be higher for 2005.
The 1.5 million Indian expat community in the Kingdom remits an estimated $5 billion annually to their home country, according to the Indian diplomatic mission here.
Considering the high volume of remittances from the Kingdom, many companies involved in exapt money transfers are active. They have been serving expats of Indian and other nationalities, whose usual mode of money transfer is done either through demand drafts or ‘hawala.’ Al-Jasser has said that the central banks of the two countries have set up a committee, which is studying the prospects of introducing and expanding the scope of Islamic banking across India.
According to him, SBI is likely to engage in trade finance and remittances business, with Indian being the biggest expat community across Saudi Arabia. Historically, most foreign banks operate as joint venture entities with Saudi banks, where they can hold a maximum of 40 percent equity. Only recently, foreign banks have been allowed to operate through branches.
The Kingdom has issued nearly 10 licenses to various banks like Deutsche Bank, BNP, the National Bank of Pakistan, National Bank of Kuwait, J.P. Morgan and Gulf International Bank, among others. Norms for setting up branches in the Kingdom are very stringent and one of the prime conditions to give branch license is that the bank should have a strong domestic presence along with a well-established branch network.
As a major source of generating worker remittances, which has emerged as a major source of external finance for many developing countries, the Kingdom has instructed all banks to introduce inexpensive and convenient channels of remittances. To further tighten the regulatory grip on money transfer firms, a number of such local firms have been consolidated into a new bank called Bank Albilad.
The Saudi economy is growing at over five percent per annum and being the largest exporter of oil, the economy has a large propensity to consume and import and that most of the money is invested domestically.
